Protecting the banks

According to Banking Day:

Momentum may be gathering regarding a delay in banking regulation reforms, with a planned inquiry into the financial system by an incoming Coalition government of the means of shepherding through any changes to policies that have already been adopted by the industry regulator, APRA.

On Saturday, The Australian newspaper reported talk within the industry that a Liberal and National government “would protect the nation’s banks… by linking up with other countries that enjoy the benefits of robust banking systems.”

In the past, industry representatives have voiced their angst over APRA’s diligent actions in implementing Basel rules quickly. Mike Smith, chief executive of ANZ (who is also chair of the Australian Bankers Association), has been the most prominent critic.

Coalition representatives, through the Senate’s “estimates” hearings, have previously voiced industry discontent over the direction of APRA policy.

..The Australian Prudential Regulation Authority requires banks to meet more stringent capital ratios from 2013, or two years earlier than the notional requirement for banks to meet these ratios under the framework devised by the Basel Committee (which drives global reform of banking regulation).

Preventing higher capital standards may be “protecting the nation’s banks” from lower profits than otherwise, but it sure isn’t protecting the nation’s banking system. One wonders why these Coalition folk aren’t more interested in finding ways of ensuring that government guarantees are never needed again or extracting a proper price for them.

And before I’m assaulted by platitudes about sound lending, great regulation and the need for more competition, I suggest you read the full Hansard of last week’s appearance by Denise Brailey, President of the Banking and Finance Consumers Support Association, in the Senate Economics References Committee.

In the end, higher capital standards are the best and maybe in the end the ONLY way to truly protect a banking system.

08/08/2012 – Effects of the global financial crisis on the Australian banking sector

BRAILEY, Ms Denise, President, Banking and Finance Consumers Support Association Inc.


CHAIR: I now call the Banking and Finance Consumers Support Association. Good afternoon, Ms Brailey. I invite you to make an opening statement.

Ms Brailey : We have a number of members who have been what they see as victims of low doc loans and bad lending practices—and, indeed, are suffering, as Senator Cameron was saying earlier, the downside of taking the entire risk for some bad practices: losing their homes, their cars, their livelihoods; and being in very dire circumstances. I have also copied 10 copies for you of what I am about to about to deliver—not to read now.

CHAIR: Is it a particularly long statement you are about to read?

Ms Brailey : No, what I am going to read will take less than 10 minutes—maybe six minutes.

CHAIR: Okay. If we can keep it as short as possible so there is time for questions, that would be appreciated.

Ms Brailey : Yes, thank you, Mr Chairman. The main thing I am going to raise, the first issue, is that the government has bought $14 billion worth of RMBSs since the GFC and I understand has committed another $4 billion to further purchases. The Fitch ratings say that eight to 10 per cent of all these RMBSs are low doc and approximately are loans obtained by fraud, and the government is holding tainted securities and profiting from that fraud. We believe there is about $57 billion involved. And, judging by the average loans, which go above FOS’s jurisdiction—we are talking about maybe 100,000 families affected—a government cannot, or at least cannot be seen to be profiting from that fraud of its constituents and must rectify that situation. The government must also rectify all of the other loans secured on falsified loan application forms—the documents that I have been gathering of late—because the government’s regulator, ASIC, has failed to regulate the financial industry as required by the ASIC act. ASIC did nothing before the GFC, nothing during the GFC and have refused, by letters to me and to other people within our group, to do anything since the GFC, as the letters from BFCSA state.

So we see that the path to rectification centres on this premise: any lender who approved a loan without verifying the loan application data with the borrower was imprudent, negligent and in many cases just plain reckless. Indeed, most of the loans would have been rejected if the lenders had made a simple phone call to the borrowers—they chose, in a corporate decision, not to do so—and ascertained the borrowers’ true financial circumstances, that would have revealed those flaws in the system and those practices. In the case of the 25 Australian Banking Association members, they are also in breach of their contract with the borrower to assess the borrower’s ability to repay the loan, as provided for in article 25 of the Code of Banking Practice. No lender, and no holder of loan securities, including the government, should be allowed to maintain any loan which the lender would not have given had it applied the simplest of lending criteria tools—namely, verifying the loan application details with the borrower. And that simply was not done.

In the pack that I delivered, I have actually provided six links in the chain. There were six links purposely designed in this structure, and it is the structure that I and my members are aggrieved by. The banks provided commissions for mortgage managers, mortgage originators and mortgage introducers that came down in a chain to employing brokers. The brokers copped the full brunt of the blame that they were falsifying loan application forms. I have brought along with me today a small bundle—I have 4,000 of these—of documents relating to every bank represented by the top banks, as demonstrated by their names. The four majors are in there. They are all responsible, through a series of emails from banks to brokers, instructing the brokers how to get their deals across the line—’make the deal fit’ was their usual interpretation. They targeted older people, carers, people on parenting allowance and the aged pension. These are all on flyers sent to 40,000 representatives throughout Australia, from the banks.

The culprit in the structure is actually progressed with the BDMs, the business development managers, who were employed by the banks; however, the paperwork suggests they were merely following policy changes that were both rapid and carried massive risk, which was to be borne by the consumer. These are serious allegations—I do not make them lightly. I have been researching this for over eight years. And the piece of the jigsaw, the proof that we require to bring it to the Senate, were these emails. The emails do not lie. They show a direct connection between the banks, at a high level of policy, and going under the radar of their own lending policy guidelines, to put these people in a position—most of them earning $40,000 or $50,000 a year—and giving them loans through a document called the ‘service calculator’. The banks will not supply those service calculators to us. We want, somehow, the parliament to force these banks to give the copies of these documents that these people are entitled to that formed part of the reasoning why their loan should have been falsified through the service calculator—their income, for want of another word, was fudged towards $180,000 instead of $40,000, in all cases.

We have the loan application forms from over 400 people in the last six weeks. During that time, not one of them is a clean document—each one has been fraudulently dealt with. But the brokers will get the blame that they put the figures on, but the figures that they have written in the original loan application form are calculated by the banks’ calculator through the system, as taught by the BDMs, or business development managers. This structure needs to be looked at before we can even start to work out whether we have a problem here in Australia. My evidence shows that we have a massive problem here in Australia with these low doc loans. I want to know what we are going to do about them, because the government has purchased around $20 billion worth of them. That is it, thank you.

CHAIR: Thank you, Ms Brailey. Just to clarify: you are saying that the people who are the borrowers under these loans did not know what was happening with these loans? Where is the level of knowledge that they would have had on this—that they knew they were getting a loan, but they did not know what the details were that were being put on the loans?

Ms Brailey : That is right.

CHAIR: What you are saying is that those applications were doctored after they had looked at them?

Ms Brailey : That is right. I have complained to each of the chairmen and CEOs of the banks involved. They have all had letters from me, in the last two or three years in particular. Each time I have said that these people got these loans without any knowledge or authority, given—

CHAIR: They knew they were getting a loan, though.

Ms Brailey : But they did get the loan; the banks will argue that they got the benefit of the loan—however, there was a sustainability factor: there was never any affordability criterion in the process.

CHAIR: So the issue from the consumers’ perspective, which is whom you represent, is that people have been provided with loans that they should not have been, because they did not have the financial ability to meet the obligations under the arrangement as it ended up, and that put them in financial hardship because of what happened up the line?

Ms Brailey : Yes, precisely: the affordability factor was—

CHAIR: You used the term ‘fraud’. Where is your allegation that the fraud occurs? At which stage of the process?

Ms Brailey : I am a criminologist, Mr Chairman, so I understand a bit about that. The fraud is in misrepresenting the true income. It was very easy for several years, for all of us, to blame the brokers who, to use their analogy, fudged the figures. But what I have found out since is that, through a service calculator, each BDM would teach the brokers to use a service calculator online and put in certain parameters such that the calculator, belonging to the bank—engineered by the bank—would actually bring out a figure that was highly inflated, based on a possible rental from a property. But we even have vacant blocks of land on them. What, are the cows paying rent? There is just no truth in the document at all. But the end problem was the whole idea that they would get a tax advantage and that was calculated in—capital gains and all these incentives. The emails actually tell them that that is what the calculator does. As one broker put it very simply to me: ‘Denise, without a calculator, we did not know what figure to put in. We put in the figure that the calculator brought to us. We were told to do that back at the office after we had the signature.’ Therefore, there was no knowledge on the part of the consumer.

CHAIR: You are raising serious issues. We have heard from Treasury that the level of defaults under the securitised mortgages in Australia has been particularly low and there is no evidence of any systemic problem with the securities that form part of the RMBS packages in Australia. Clearly there were in America and other parts of the world. The evidence here suggests that there is no systemic issue. Obviously there will be individual cases that you can find where there have been some problems but there is no systemic problem. How do you respond to that?

Ms Brailey : That is why we need a royal commission into the banking sector—they are strong words but that is what we need, because those figures are clearly wrong. The way the figures are translating at the moment makes you think that but that is not the reality. The reality is that some of these people were given buffer loans to refinance, refinance and refinance, so they are never in default. I have a list 100 people who are still in their houses and have not paid a payment for four years simply because I have been there. There is a stalemate going on. They are not taking the houses but on the other hand the defaults are there, and I do not know what figures the bankers have decided to put those into.

CHAIR: That is interesting as well because we have also had a lot of complaints that the banks are too aggressive in coming and taking the collateral.

Senator WILLIAMS: There are many low doc loans or no doc loans issued from banks. I have some cases here today and one is of a woman in an aged-care facility and at the age of 98 she signed a document for a 30-year loan. She must have a good doctor!

Ms Brailey : Yes, that is fairly prevalent.

Senator WILLIAMS: Of course on the advice of the bank manager she invested that and that company went broke. She is one of many. Are you telling me that these low doc loans and no doc loans were packaged up by some institutions and sold off to the Australian Office of Financial Management as residential mortgage backed securities?

Ms Brailey : Yes.

Senator WILLIAMS: What is the figure there you think?

Ms Brailey : Fitch is saying that it is around eight to 10 per cent on low docs. I suspect that it is lower simply because inadequate figures have been provided.

Senator WILLIAMS: I asked witnesses earlier who about rates these packages of loans when they are sold off to the government or anyone else? I think the response was that it is Moody’s and other rating agencies.

Ms Brailey : That is right.

Senator WILLIAMS: The similar lot who rated the subprime loans in America.

Ms Brailey : Exactly right.

Senator WILLIAMS: You mentioned the Financial Ombudsman Service, FOS. If you want to lodge a complaint with FOS, their maximum loan limit is $600,000—is that correct?

Ms Brailey : No, a correction there: it is $500,000 that they can investigate but only $280,000 in terms of compensation. That is a decrease on a $500,000 loan. So the victims, the consumers, who are still suffering this are told to wear half the problem, and they may end up in their seventies and their eighties with a $400,000 or $500,000 loan.

Senator WILLIAMS: Were low doc loans for self-employed people only?

Ms Brailey : Yes, that was the original idea: low doc for self-employed, ABNs for two years minimum plus GST registered. In these emails, I have highlighted where they show, time and time again—and some in big letters: ‘We do ABNs for a day. No LMI.’

Senator WILLIAMS: Who is saying, ‘We do ABNs for a day?’

Ms Brailey : The banks. There are 36 lenders involved that I have emails from showing them all doing the same thing.

Senator WILLIAMS: Are you saying that to be self-employed and to prove that you have an ABN the banks will issue you with one?

Ms Brailey : The brokers get them online. The BDMs teach the brokers to go online and get an ABN and then, ‘You can do that if you have the ladies or gents TFN.’

Senator WILLIAMS: I have a document here from one of the big four banks. It says, ‘What’s new? Low doc loan policy requires a main income earner primary applicant to be self-employed. While self-employed status is declared by the customer in their loan application this information is not validated during the loan approval process.’

Ms Brailey : Yes, that is right. I have seen emails like that.

Senator WILLIAMS: I can ask the banks about this on Friday. You wrote to ASIC and in that letter dated 21 November 2011 you said, ‘On behalf of all consumers of bank products and services in Australia the two key questions we are seeking answers to are these. Which bank flagged a hybrid low doc model to all the other lenders so that the product miraculously appeared on every lender’s books at the same time?’ Are you saying that one bank went out to the public saying, ‘Here’s our low doc loans’ and all the other banks did the same thing on the same day?

Ms Brailey : I believe so. Evidence suggests that, but, again, that is why we need a royal commission. These are valid questions that go to the very heart of our banking system.

Senator WILLIAMS: The next question you asked is, ‘Which bank designed the six degrees of separation between lender and borrower and ensured the plans were identical?’

Ms Brailey : That is the structure that I designed. There are six degrees of separation in order to escape liability—there cannot be any other reason. All they had to do was to get a white sheet of paper and put on it, ‘We do low docs here’ and stick it in the window, and they did not have to pay commissions to all these people, unless there was an ulterior motive.

Senator WILLIAMS: These people with low doc loans were classed as asset rich, income poor—is that correct?

Ms Brailey : Yes.

Senator WILLIAMS: Your letter says that public identification of pensioners in 2004 as a new $50 billion market by one particular investment bank ought to have sent regulatory alarm bells ringing.

Ms Brailey : Yes. It was published as well. I was front row when 1,000 planners were in the room and they were discussing ARIPs. I have never heard it before, asset rich, income poor—let’s go after the pensioners. I thought, ‘My god, this is where they are going.’

Senator WILLIAMS: So these pensioners, if we can call them that, might own their own home. The value of it would depend on where they live. In Inverell where I live, it might be $250,000 or $300,000 and in Sydney in might be $1 million.

Ms Brailey : In Chatswood in Sydney, an average suburb, a 1960s home would easily be $1.5 million.

Senator WILLIAMS: They would get a low doc loan, borrow half a million dollars and they would not have any income coming in to pay for that loan. They would invest the money wherever and then it would turn pear-shaped; hence they would have trouble. Are these low doc loans still being issued today?

Ms Brailey : My word they are because the broker channel really only sells low doc and no doc. We have tracked the no docs back to 2005-06 when the first couple came through. Thirty-six lenders became involved in the no docs. The only reason they came into play was that the brokers just did not get the service calculator and it all became too hard. So they ditched the service calculator and said, ‘We don’t have any income anymore.’ Again, these emails say: ‘No income. No asset and liability this statements.’ I have one particular email where the BDM is particularly saying to the broker, ‘If you want to switch from a low doc and no doc, you really have to write it up again because we know now what the asset and liability is, and we know at the income is, so you will have to do it again and submit it as a new one. You cannot just change over because we have seen the other two documents.’

Senator WILLIAMS: I was on the parliamentary joint committee that inquired into the crash of Storm Financial and Opes Prime et cetera. We saw the situation where a retired couple who may own their home that was worth $600,000 were lent $300,000 from whatever bank and then that became a deposit on a $1½ million loan in shares. The stock market crashed and everything went pear-shaped, and we all know what happened then. Many of those Storm loans would have been low doc loans as well, I imagine.

Ms Brailey : Yes, I have seen some of those and they were definitely fraudulent loan application forms by persons unknown. That is why I say, even to ASIC, ‘by persons unknown’. Until we have an inquiry, we do not know whose writing is on those forms. Every form we have uncovered so far—and this is for the people who are behind me here today as well as the other 500 members—has had three people’s handwriting on those forms. Unless the broker decides to write in three different hands—

Senator WILLIAMS: Let us just go through the application form. Normally an application form is three pages.

Ms Brailey : The banks have told us they were three pages. The banks gave the courts documents to say the loan application form was three pages. They were not; they were an 11-page document—always.

Senator WILLIAMS: So when the customer signed off the loan application form, the customer signed three pages not 11?

Ms Brailey : Three pages, that is right.

Senator WILLIAMS: You are saying that after the customer signed those application forms, figures were altered on the 11-page form?

Ms Brailey : Yes. The way it worked was that the other pages of the application—and I have this complete one here—were inserted and that would be faxed through to the bank. The people would never see the rest of the document.

Senator WILLIAMS: Did you ever get a response from ASIC to your letter?

Ms Brailey : Yes. All they are saying of late is that they have the new NCCP laws and they cannot look into anything further, and we have letters that say they assess every case. They are motherhood statements. They say they assess every case but they are not doing anything about it.

Senator WILLIAMS: I am very familiar with the motherhood statements from ASIC. Were those applications for loans processed by solicitors?

Ms Brailey : Yes, and the predominant one I wish to bring to the attention of the committee is Gadens. Kemp Strang is in there a fair bit, but mostly the major banks use Gadens. I am tired of Gadens being the bully in this in terms of handing over the documents. The banks are sending these people around in circles saying, ‘You’ve got to ring Gadens to get the copy of the documents because we have given it all to them.’ Then Gadens say, ‘You’re not entitled to those documents.’ I have Gadens’ letters to me saying that the people are not entitled to those documents.

Senator WILLIAMS: Their loan application papers et cetera?

Ms Brailey : Yes. I am also asking for the service calculator. They say they did not sign the service calculator. For two or three years, I am the one who has had to argue on that level with the banks and their lawyers that these people are entitled to these documents—they have signed them, they went as a package and the bank relied upon them to furnish the loan. This is the document they relied on. The actual loan application form, the complete set, is 39 pages.

Senator WILLIAMS: And the customer signed three pages.

Ms Brailey : Yes, and was never given a copy. That was one of the key indicators I raised with ASIC in 2003. The ATO did an investigation into this in 2005. It was broadcast on the ABC. I rang Mr Carmody at the time, or his office. I went to Sydney and spoke with two of their investigators on this issue and they told me at that time, ‘Denise, if you’re right then there is nothing in it for us.’ They closed down the investigation. ‘This is a job for ASIC.’ But ASIC never did anything. So we went around again. I probably killed that investigation for the tax office. What they clearly saw was that both cannot be right. You have a tax return that says that somebody, like the people behind me here, might have $20,000 income and then over there it says that they have $180,000. Of course the tax department thought there were an awful lot of people not getting their tax returns right and that the true figure, if there are two figures and one is wrong, is in the tax return. But once they had a chat with me, and I took in six of these to show them what was going on, it all closed down and went away.

Senator CAMERON: Congratulations, Ms Brailey, on the work that you are doing, trying to protect people from the excesses of some of these banks. I do not want to go through all of the issues that Senator Williams has been through. As I understand it, you are acting mainly for people who have taken out low doc loans and these are predominantly individuals and companies—is that correct?

Ms Brailey : That is right.

Senator CAMERON: Would it surprise you to know that I have had complaints on similar terms to the ones you have raised but also from people who have been induced into borrowing to $2 million—

Ms Brailey : I think we have a lady in the room who has borrowed $4 million, and she is in her seventies on her own, a widow.

Senator CAMERON: Are you aware of an ANZ product called ING Wholesale Property Securities Trust?

Ms Brailey : I am not sure. I would have to take that on notice simply because I have seen ING on several documents, whether it is that particular trust you are talking about.

Senator CAMERON: This constituent who has written to me has indicated that he sought some financial advice from ANZ and he met with a relationship manager, an assistant manager and a financial planner. He was advised: ‘Here’s what we can do for you. Your money won’t be at risk and you will get an ongoing income.’ Is that a consistent position that you have heard?

Ms Brailey : That is right. The relationship manager is the one I referred to as the business development manager—they all have something similar.

Senator CAMERON: ANZ call them something different.

Ms Brailey : Yes, consistent with what I have been discussing.

Senator CAMERON: This individual constituent said that he was given a range of figures by ANZ. These figures were substituted after they had signed with a whole new set of figures that were completely inconsistent with the original figures and meant that there could never be any return from this investment. Have you heard of issues like that before?

Ms Brailey : Yes.

Senator CAMERON: He goes on to say that he complained to the ANZ on many occasions. He complained about bullying tactics, high-pressure tactics, having all of the funds going to debt reduction, asking him to sign blank documents, telling him not to date documents, advising that he could not change any conditions he was not happy with, just sign the documents, fix them up and if he did not sign they would all be sent to Melbourne and he would be disadvantaged. Have you heard of issues like this?

Ms Brailey : There are issues like that, yes.

Senator CAMERON: He was told he would be investing in what he thought was a stand-alone fund, but the actual investment was in a holding fund which was a range of different funds. Is that common?

Ms Brailey : Yes, meaning the funds are gone.

Senator CAMERON: Yes. People are experiencing problems and these are people who probably should have known better than to sign documents and to leave things the way they were. But I suppose that is what happens.

Ms Brailey : They trusted the banking system.

Senator CAMERON: That is the issue—they trusted the system.

Ms Brailey : Yes, they did not give the funds to the chap down the road.

Senator CAMERON: I would like to take you through a couple of points. Professor Joe Stiglitz, a Nobel prize-winning economist, had a look at the banking system in the US and the issues that system brought about for the global financial crisis. He recommends a number of things to reduce rent-seeking in the global financial crisis in his latest book called The Price of Inequality. On page 269 he says what should happen is that there should be a curb on excessive risk-taking in the too-big-to-fail and too-interconnected-to-fail financial institutions. Do you agree with this?

Ms Brailey : Yes.

Senator CAMERON: You would agree with that curb on excess risk-taking in the banking system, that it is a good thing?

Ms Brailey : Yes, absolutely.

Senator CAMERON: Professor Stiglitz goes on to say that we should make banks more transparent, especially in their treatment of over-the-counter derivatives. That is consistent with your view?

Ms Brailey : Absolutely.

Senator CAMERON: He says that Warren Buffett said that these are ‘financial weapons of mass destruction’. I think we have seen some of this.

Ms Brailey : I have seen the destruction. I am at the coalface of seeing that with my own eyes.

Senator CAMERON: He goes on to say that we should make banks and credit card companies more competitive and make sure that they act competitively.

Ms Brailey : I do not tend to be the expert on competition, but I can assure you that the commissions that were being set, as the professor said before, and the amounts of money being pumped through in bonuses and other incentives have been a real catalyst here.

Senator CAMERON: I will come to that, but this is about competition in the banking industry. Do you think there is enough competition in the banking industry?

Ms Brailey : I think that word is a bit overused in the context of this at the moment. I would not say that there should not be competition in the banking sector, but on the other hand what we need is an enforcement of law. We need strong enough regulations so these sorts of things are not happening.

Senator CAMERON: Professor Stiglitz says we should make it more difficult for banks to engage in predatory lending and abuse of credit card practices, and we should curb the bonuses that encourage excessive risk-taking and short-sighted behaviour. I suppose that is bonuses right through the banking system.

Ms Brailey : Yes, that has been a catalyst.

Senator CAMERON: He argues that offshore banking centres such as the Cayman Islands should be closed down because they are being used to facilitate this. Would you agree that these are issues that are important for this committee to consider?

Ms Brailey : I certainly do.

Senator CAMERON: Are you aware of the High Court decision on FirstMac in Queensland?

Ms Brailey : I am glad you brought that up. I was the person that put those people together in the first place. I then brought the legal issues up and I took them to Neil Jenman to see if he would fund the case—he is a friend of mine. That is how that case got up and running. We knew that normal processes of funding would only be for a few of these families—I had 50 families in that situation at that time in Sydney and we were only able to get funding for three families. As you know, that would be at least $1½ million if they go all the way and we would need deep pockets to keep going. I was in litigation funding myself and I understand those issues fully. I understand that particular case. I have 12 of the original files at home and they were all fraudulent loan application forms, exactly as you are seeing today. Nothing has changed since 2003.

Senator CAMERON: What are the lessons for legislators in relation to this state decision and the High Court decision?

Ms Brailey : The lesson is that the legislators got it right. They actually provided the laws, but those laws were not being used. I wrote to the ASIC chairman—excuse my emotion in that—to say this was in the public interest and asking for funding to take this case, as an atypical case, to court. That funding was not forthcoming, and then ASIC had the gall to waste my time in 2009 by making me sit in the court for two days and listen to their twaddle about how they are helping us out. I must admit I get emotional about that. I had to fly to Sydney and listen to them for two days out of five they had allocated to this case.

Senator CAMERON: ASIC are appearing before this committee, so we will be able to ask them about the ‘twaddle’.

Senator WILLIAMS: Next cab off the rank.

Ms Brailey : I would love you to do that.

Senator CAMERON: In Professor Stiglitz’s book, he talks about some of the risk-taking behaviour of banks. He says that the risk-taking is a major source of the volatility in the economy. He says there are four explanations for the behaviour, and given that you have been dealing with banks I want to get your view on that. He says there are four possible explanations for this risk-taking behaviour. First, organisational incentives, and the banks actually push off much of the risk to government because they are too big to fail. That is a big debate that has been taking place worldwide. Second, individual incentives which he describes as agency problems. Those inside the bank have incentives that encourage risk-taking. Third, self-selection in that in any society there are those who are risk-loving and are attracted to the financial sector. You get people going into the financial sector who like risk-taking. Fourth, what he describes as pervasive irrationality. Those in the financial sector systematically underestimate risk and their investors do not understand the risks of leverage and underestimate its consequences. Do those issues resonate with you in your experience?

Ms Brailey : Yes, they were not real investors. They were mums and dads who owned their own homes and they were told: ‘If you just borrow this amount of money for the next six months or so, suck it and see. Try and get yourself an extra $10,000 a year, and we can invest it for you.’ That is where you find that the banks are interrelated at times with the source of the properties they are putting them into. That is what needs a royal commission. If we do not get it right this time we cannot have a son of Wallis. That is just a review. I cannot put it any more strongly than this: we need the Senate to push as hard as it can for a royal commission into the banking sector and have all this examined, so these people behind me get some justice.

Senator CAMERON: I suppose that is one way of going down that path. My experience of royal commissions in the building and construction industry has not been very good—lots of money spent, but not a lot of outcomes. Maybe there are other avenues we could have a look at, and that is the role of ASIC providing support for litigation and test cases like the one that you have raised.

Ms Brailey : I would not agree with that at all. I am sorry, but I have a different opinion. ASIC will not enforce the law. It has decriminalised that which parliament deemed criminal activity.

Senator CAMERON: ASIC has decriminalised it?

Ms Brailey : Yes. We are talking about policy, and ASIC blames the government for the policy, whichever government is in power. I just go around in a loop at a fairly high level with ASIC. I have got as far as talking to the deputy chairman at some time. I have had several discussions with ASIC on those sorts of levels. I am saying that unless we have documents from the banks tabled somewhere—these people do not have the money to take the banks to court and the banks know that—you will not get to the truth. You have $57 billion worth there and 100,000 families that are possibly infected with this problem. If we put blinkers on and say we do not want to look at it or it is all too hard or it is too costly, as you said before, the cost of this could be much, much worse if we ignore it.

Senator CAMERON: What we are being told by all the evidence that has come before us today—I think that is right—is that our banking industry is different from the international banking industry. We have a highly professional banking industry. The industry is regulated to such an extent that it is not tarnished by the problems that tarnished the US and the British banking systems, for instance. But what you are saying is that in our banking industry we have a degree of criminality—that is your allegation—and lack of any view that society counts for anything. Is that your submission here today?

Ms Brailey : That is right. We have this problem with all of these people. Do we wait until we have 100,000 outside parliament? It may sound dramatic, but we found utter fraud from the highest level of banking, not the underlings at the bottom in the various small departments. We are talking about a structure, somebody sat on the top of the banking world who flagged it to every other bank. Why? Because they did it in America, Too Big to Fail. That book goes into the mix as well. George Bush had the same problem in America as we do now. He went to the bankers who said, ‘We are as bad as we are, but what are you going to do about it?’ Who is in charge in our country, our nation? I want the parliament to take control of this situation, because I am trying to flag to parliament, in my own small and modest way, that there is a major problem out there. The figures show that there is no problem in the banking sector and these documents do not lie, but there is a problem in the banking sector, because one of us is lying—and it is not me.

Senator CAMERON: One last question, Stiglitz describes modern capitalism in the finance sector like this: those that win at it—that is, the capitalist system—often possess less admirable characteristics as well. The ability to skip the law or to shape the law in their own favour, the willingness to take advantage of others, even the poor and to play unfair when necessary. Is that how you would describe Australia’s banking system?

Ms Brailey : Yes, I do.

Senator CAMERON: The same as Joseph Stiglitz describes it?

Ms Brailey : Yes, I am not making that comment lightly. I am saying, yes, I agree 100 per cent because of what I have seen for the last eight years starting with that High Court case. If I had not done what I had done at that moment in time in 2003 of taking the trouble—free of charge—spending 18 months gathering those people and those documents together, it would never have got to the High Court.

Senator WILLIAMS: You are calling for a royal commission. I have called for that before into white-collar crime in Australia. If only 10 per cent of what comes into my office is true, we have a problem.

Ms Brailey : Yes.

Senator WILLIAMS: Where does it stop? Look at the Health Services Union. Look where the money has gone there. I agree, we should have a royal commission and include the union in it as well for where people’s union’s fees or a people’s money is being spent, laundry or what games are being played.

Ms Brailey : I managed to get a royal commission in Western Australia one time. I have got 12 inquiries through lobbying including a royal commission so far. That royal commission, although you could sit back and say well it did not do all the things we wanted it to do, it brought the documents out and it brought a lot of truth out we would not have got had we not had it.

Senator WILLIAMS: Well done.

Houses and Holes
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  1. +100 for publishing this.

    I found this part of the testimony particularly troubling.

    Ms Brailey : The lesson is that the legislators got it right. They actually provided the laws, but those laws were not being used. I wrote to the ASIC chairman—excuse my emotion in that—to say this was in the public interest and asking for funding to take this case, as an atypical case, to court. That funding was not forthcoming, and then ASIC had the gall to waste my time in 2009 by making me sit in the court for two days and listen to their twaddle about how they are helping us out. I must admit I get emotional about that. I had to fly to Sydney and listen to them for two days out of five they had allocated to this case.

    We don’t need more regulations, just an enforcement of existing ones.

    I think in the end, Neil Jenman funded the litigation through his fund and whats more, they won the case against FirstMac in the high court!! Bravo!

    IMHO, ASIC, Treasury and RBA in their current form are government institutions straight out of a banana republic.

    • I’m glad this evidence is finally coming out.

      I remember writing a few posts on my old blog about check-out chicks and part-time tradies getting $300,000 loans for houses. It was very obvious that these people had no real capacity to services these loans and the lenders were giving them loans purely on the basis of asset value appreciation.

      The thing that struck me about the testimony were the comments about the issue not being systemic. Again this seems to be purely based on the idea that house prices were going up so there isn’t a problem. It is very “Storm finacial”-ish IMHO.

      • rob barrattMEMBER

        I don’t suppose senior bankers spent much time reading Hyman Minsky. My experience of banks was that it was a dog eat dog world “perform or else”.

        It didn’t matter what the rules were, if you broke them (which you had to) it was fine as long as you didn’t get caught in a public scandal that threatened the bank’s reputation. If a scandal did break out there were 2 phases that followed ;
        1) the hunt for the guilty
        2) the punishment of the innocent.

      • +1 On top of the US style NINJA loans , we also have ARIP loans (Asset Rich Income Poor) from the baby squid Maq bank and others.
        AKA get nursing home resident, 90 year old grandmas to sign away their assets for some risky ponzi investment loans.

      • I could never understand what was wrong with me. I couldn’t afford one of these houses nor a wee Benz or Beamer to park in the Double Grudge! Everyone else seemed to be having no trouble.

    • Wow this is absolutely huge… hopefully the new Vic prison will be built in time for sentencing of every single complicit link in the chain… especially those at ASIC. Fantastic article thanks a heap for posting it.

  2. rob barrattMEMBER

    I think you will find that the coalition will merely continue to uphold the policies adopted by Mr Swann. That is, rely on ASIC, APRA etc remaining permanently toothless & do – nothing.

  3. This is a bit of a bombshell H&H. I agree with rob that nothing will be done as all parties are incompetent.

    Also, Australian regulators/politicians can do what they like, but the RA’s will make up their own mind, and won’t that effect our haven status?

    • Indeed. Both parties are not only incompetent, but complicit. One only need look over the Hansard (12 Oct ’11) at the comments made by the Coalition in support of the introduction of covered bonds. Indeed, the only point of disagreement between the parties was that Hockey wanted the credit (!?!) for positing the idea first.

      The excellent Michael West:

      Make no mistake, our politicians are totally beholden to the financial sector.

      • Nah, just shit scared of the ramifications. The banks have called their bluff and now as the seam comes unstuck, watch as our Dishonourable Members bail on the bankers.

        • Agree with you there, Wingnut. If this “grows legs”, which I expect it will, watch them line up like Tories giving Rupert a kick!

  4. Great work and keep it up!

    Incredible how little attention is being given to our own version of Fannie And Freddie.

    The best approach is to keep a spotlight on this type of material.

    Slowly but surely the MSM are starting to realise that more and more people are going elsewhere for coverage of important issues.

    Hopefully some of the better MSM will start moonlighting and writing blog posts etc on stories that their day job employers dont believe there is an audience for.

    • If there was one story the sits fair and square in the AFR’s beat it is this one.

      AFR editorial neglect of this issue while preferring party political sloganeering and the running of personal partisan agendas is a betrayal of the AFR’s proud history of high quality impartial analysis .

      As editor Stutchbury is responsible and should be condemned.

  5. Presumably when the Coalition gets in it will leave no policy stone unturned in its effort to postpone the property correction “we have to have”. In the eyes of Joe Public whoever is in office when the SHTF will be held responsible and that won’t be 100% fair. I do worry a bit about this dynamic. We don’t have any grown up leaders who are qualified or prepared to have a heart to heart with the nation on this issue.

      • “As suspects, accused of “dumbing down politics”, I’d answer these questions as “not much” (media), “loads” (political parties), “loads” (bureaucratic arm of government), “not at all” (general public) and “loads” (parliamentarians themselves).”

        Loads…media and political parties
        Loads…bureaucratic arm

        The idea that we, the people, are totally faultless is dangerous at best.

        • “The idea that we, the people, are totally faultless is dangerous at best.”

          This could be the phrase to define an era. Throughout the entire GFC from Lehman through Ninja Loans all the way to the European Sovereign debt crisis the man on the street has somehow remained faultless in the eyes of the media and the public.

          Sure in cases like Goldman Sachs or Lehmann the public didnt do anything wrong, however people still signed up to the NINJA loans and drove housing prices up to begin with, we as a society are far from blameless.

          We who contributed to the problem need to put our hands up and admit our mistake instead of continually blaming someone else. It is the only way for us as a society to move on from this crisis but as always Joe public is blameless.

          I would imagine the vast majority of people who got these No-Doc or Low-Doc loans were happy to get the loan, they applied for it after all. Yes the bank likely fudged the data, however the man/woman on the street got what they wanted. If what they wanted blew up in their face that isnt just the banks fault for being stupid enough to give them the money but the loan customer must accept their share of the blame for not doing their homework.

          The world of business is littered with people who didnt do their homework and failed, why should these people be any different.

          There is plenty of blame to go around.

          Just for the record there are exceptions to this, for example the 98 year old woman talked into buying into a risky investment or the customers unfairly pressured into borrowing.

        • Fine line flawse. If a person makes a loan they know they can’t afford then they wear the consequences but unfortunately we live in a society where personal responsibility no longer exists. If a person makes a loan they otherwise would not be approved for but has been tampered with without their knowledge and approved – that’s fraud.

          • Wing you’re right of course. There is just a dangerous tendency, as Tarric points out for us all to assume the mantle of perfection. Sewn into such a mantle is the thread of extremism.
            Again with respect for HnH’s work here I don’t want to argue the point. But blokes like the one who wrote Rob’s quoted article, who assume for themselves the cloak of determination and perfection, are dangerous. They knit like Madame Defarge.
            Sorry to belay the point.

    • Jumping jack flash


      Passing around the hot potato. Look no further than Greece.

      It doesn’t help that Government is completely controlled by the banking and finance sector. At the most basic level, how many politicians have mortgages, investments, etc, that they don’t want to have correct?

      And that’s not even considering the effect of skilled FIRE lobbyists on government and the under the table behind closed doors deals that may or may not go on.

  6. Criminologist Brailey’s testimony before the Senate contradicts public statements by the RBA, APRA, the banks, and on, that Australia’s finance system is ethically managed and loans are based on prudent criteria.

    Is anyone surprised to find the same garbage the US banks bloated their balance sheets with?

    If the scale of the problem is as Brailey puts it – 100,000 borrowers and $50 billion – the banks will be most unwell for a very long time.

    Don’t Buy Now!

  7. Have i got this right. The banks don’t want anymore regulation thrust on them. Theyre up to their eyeballs in malpractice (is unconscionable conduct going to far given apra doesn’t seem to have a clear ruling on what that means) and they’ve been supported by govt buying up what turns out to be dodgy RMBSs. No doubt this will support those who advocate govt stay out of these matters. Cos now they’re both got some liabilities and the day of reckoning appears to be close, until it isn’t. Nothing to see move on, we’ll run our decoys and screw em (100000 people) over cos its in the national interest.

  8. I can’t say I’m surprised.

    When I look around me here in Adelaide I see many, many properties that are falling apart. Gardens are not landscaped but cluttered and the interior hasn’t had a lot of attention.

    Add to that the shocking state of rustbucket cars on the road and just the general sense of poverty and you can see that this does not mix with $400,000 properties.

    A very large portion of Adelaide’s households have an income of only $50,000 annually yet many of them manage to live in multi 100K houses.

    Go figure how they got the loans.

  9. fiduciary -n
    a person bound to act for another’s benefit, as a trustee in relation to his beneficiary

    Once upon a time bankers possessed fiduciary duty. Seems fiduciary duty has been outsourced as well.

    • dumb_non_economistMEMBER

      Nezman, it’s a waste of time talking about duty, fiduciary or otherwise. Not many people these days give a hoot about duty and by that I mean behaving in an appropriate manner. IMO, everyone involved in those loans are responsible including the brokers who I would heap are large amount of shit on if it was possible. For a broker to argue that they were minor players is a joke, they took on well paying jobs which just required time and no real effort, just had to turn a blind eye in what they were doing, they can’t claim ignorance in helping people with little or no income gain fcuking large loans. As Hinch would say; Shame, shame, shame!! And I’m not laughing. All involved are a bunch of low life scum whom deserved to get hit by a truck for the pain they have caused.

      • dne, you are correct in that the sense of duty is ignored by most and the Hinch quote is very appropriate.
        All levels from the broker to the executives of the banks are responsible. Everyone will blame somebody else.
        As others have pointed out, if regulation was policed correctly then these products would have been reviewed and the loopholes would have been tightened up to ensure that we do not get into this situation in the first place.
        Once upon a time, bank staff would have been sacked for fraud with potential criminal proceedings. Now they get promoted.
        I must be a believer of fairy tales to keep saying once upon a time so often.

  10. FYI – From ABC 7.30 re Banking Inquiry story

    Thanks for your email. The story will be going to air tonight. If you have anyone who would like to contribute or provide information please send contact me (to the address cc’d in this email) or the reporter Stephen Long (who I have cc’d on this email). It may be that we don’t have the time to include new people into tonight’s program but we could include new pertinent information or even if we don’t we’d be keen to do follow up stories.


    Jo Puccini
    Commissioning Editor

    [email protected]

    [email protected]

    • Maybe in their follow up stories (ha!) they’ll actually attempt to speak to someone from, I dunno … a bank.

      If you’re gonna do a story Current Affair style, why miss the opportunity to have the journo walk in on a table of bankers out to lunch at the Flower Drum, confronting them with the evidence?

  11. At risk of annoying readers of SoN’s excellent weekend piece, this article compels me to repost something I wrote there:

    How can “finance” ever be considered a “service” ( ), when the core of banking is the loaning of “money” electronic bookkeeping entries … at interest … in exchange for a signature on a document that renders the signatory a debt slave of the lender?

    The reality is, “banking” is parasitic. It does not provide a “service” at all. Rather, its core profits arise from the enslavement of others, via leveraging their daily labour. En masse.

    Additional profits then arise from the provision of add-on “services” – eg, fees and charges for the granting of access to “your” … digital bookkeeping entries. Which are merely tokens of someone’s debt slavery – if not yours, then someone else’s.

    Until the provision of “money” as the lifeblood of human economy no longer means debt bondage, “banking” and “finance” cannot be considered a “service”.


    I find the debate flowing from the northern hemisphere – who are merely a few years ahead of us with their troubles – regarding banking (re)regulation / reform, to be quite frustrating.

    You cannot reform an organism that is, by nature, a parasite.

    You have to get rid of it.

  12. Hmmm – does anyone else get the feeling we are at a tipping point.

    Not the “have a royal commission” type tipping point but rather a GFC style meltdown where the government needs to ride to the rescue to conveniently cover up the slow unraveling of the RE and banking cartels.

    • I’m hoping that the tipping point you’re talking about is simply about morality – the moral compass in both cartels has been totally shot.

    • Yes, I think we have some money printing and some inflation to come.

      Finally I went and bought a property to live in as I now believe that the gov’ts are going to print world wide and hang the consequences.

  13. When someone at the government and ASIC realises that they can actually make money out of fines from the banks, then we might see some action.

    That does of course presume that someone in the government and ASIC actually understands the banking regulatory system.

    • I understand the regulatory system and I think we could save some money by sacking the lot of them including fair trading departments.

  14. I think RBA will kybosh this as this would be a threat to banking stability.

    I wonder if the people who took this fellows advice will have a case to answer if the figure of 10 to 15% low doc loans is correct.

    “In 2008-09, the Australian Government invested $20 billion in a radical policy proposal developed by Chris to provide liquidity to Australia’s securitisation market.”

  15. via twitter 20 mins ago


    Have low-document mortgages been misused? @StephenLongABC looks at Australia’s own sub-prime scandal on #abc730 tonight… #ausbiz

    • Good effort from Stephen Long but 10 mins hardly does the story justice.

      Would be better suited to the full 4 Corners treatment. Long should step it up.

      Lots of material there and would benefit from some big picture analysis and some recomended reforms from a macro/finance expert.

      DE, Leith, Rumple?

      • They absolutely flubbed it, to be polite. That was embarrassing to watch. I fear that is the last substantive coverage it will receive (outside of this site, anyway).

        Should have been the lead story (had it not been so weakly constructed), and it wouldn’t have hurt them one jot to hold it over a few days until attention on the asylum seeker panel report and Olympics closing ceremony had dissipated.

        Living in a Banksta’s Paradise.

  16. I share everyone else’s sentiments here. However we ourselves are not without guilt. We take the easy way. We vote out anyone who tells us we have to do it a bit tough. We vote out anyone who tells us we can’t get rich just by buying real estate.

    Some people have probably bought the house they NEED for their family. However have a look at the sort of houses that are mostly being built. Most are built to be the biggest flashest possible, with the biggest loan we can get, so that as the RE market goes up, as it ALWAYS does, we will be rich.

    So let’s not forget there is a bit of ‘US’ to blame here. it’s not only ‘them’

    If we were to look at the media we ought also take a damned careful look at the sort of ‘image’ advertising and its long term effect on our society.

    I don’t wish to dilute the impact of HnH’s great work here. I just worry about a little too much self-righteous indignation.

    • Agree flawse that we need to critically look at the effects of the ‘no blame’ society we have developed. Unfortunately, we’re not dealing with that here. We’re dealing with people who applied for a loan expecting our ‘prudent’ systems to judge their worthiness. If the system worked as we’re lead to believe, these people would not have gotten their loans. Instead, we’re looking at a system that promoted and rewarded fraud while our ‘prudent’ authorises remained oblivious to events.

      • Thanks for those thoughts nut…agree. One step at a time! As long as it is a step forward. My extremism antennae are just a bit overactive these days perhaps.

  17. None of this surprised me. If we have a mortgage debt/gdp ratio higher than the USA and higher interest rates, we must have much higher asset lending with higher capitalised interest and liar loans. When the LVR hits 100+ the detonation will be spectacular.

  18. I saw the 7.30 report tonight before reading this MB thread. I was so scandalised I did a bit of armchair research, and came across “Report 262” from ASIC dated Nov 2011 which specifically looked at Credit Act compliance including low-doc loans in the “credit assistance” sector:

    After reading this report in full I was befuddled by the, what shall I say, the “softly softly” approach taken, especially given the disgusting behaviour 7.30 had just reported. If you read the ASIC report 262 presser, it creates the impression all is well. You know the drill, “room for improvement”, but basically she’s apples. But take the time to read the report in full, and they were repeatedly saying the review they conducted found instances of non-complience. But they did not at any stage quantify just how much non-complience! I was so dumbstruck by the restrained tone of the report I have registered some questions to ASIC about the review’s methodology, and its failure to quantify the extent of non-complience.

    It’s good to see the Bailey testimony getting attention here on MB, and to see concerns about fraudulant credit provisioning being expressed by many others here. Hoping these concerns about low-docs won’t just go away. I completely agree with views expressed above that the laws are ok but regulators are failing to enforce. Keatingism’s about being flogged with wet tram tickets come to mind. ASIC really need a bunsen burner put under them on this one.